Earlier this week, Global Equities Research analyst Trip Chowdhry made a point of saying Tesla Motors Inc (NASDAQ:TSLA) would undoubtedly 25,000 electric vehicles during the fourth quarter of this year. That would leave the year-ago unit count of 14,037 in the dust, and largely silence the doubters. It was music to the ears of TSLA stock holders, of course.
It also underscored something Business Insider contributor Matthew DeBord submitted late last week, saying, “It could be decades before Tesla has anything that even remotely resembles a sales problem. Get used to it.”
One would think such bullishness would catapult Tesla stock much higher. Yet, there it is … TSLA continues to drift lower, and is knocking on the door of new multi-month lows.
In short, the market is far more convinced of some less-enthusiastic but more plausible ideas presented by Mark Spiegel, founder of hedge fund Stanphyl Capital Partners, and Cowen & Co. analyst Jeffrey Osborne, both of whom essentially think the production of the ballyhooed Model 3 could end up killing the company.
Crunching the Numbers
For the record, Chowdhry is probably right; Tesla Motors probably can crank out 25,000 vehicles for the current quarter. It managed to ship roughly 24,500 automobiles last quarter.
That, however, isn’t the relevant factor it used to be — the market knows TSLA can mass-produce cars. The question is, can the company produce that many vehicles profitably and simultaneously turn its recent SolarCity Corp (NASDAQ:SCTY) acquisition into an actual profit center rather than a money pit?
Spiegel has his doubts, and backed up his opinion with some credible numbers.
Based on Tesla’s current results as a manufacturer of the Model X and Model S, Spiegel reckons the average automobile costs Tesla Motors $81,000 to make. That figure can be (and would be) reduced by about $6,000 apiece when the company’s gigafactory is making enough batteries for itself rather than purchasing them.
And, in that scaling up the size of the operation will lower relative fixed costs by another $5,000 per automobile. Switching from an aluminum frame to steel could shave off another $5,000 per unit, and Spiegel is even willing to deduct another $15,000 off the production cost to account for the unforeseeable fiscal benefits of scaling up output of a smaller car.
That still leaves a cost of $48,000 each.
It’s admittedly back-of-the-envelope math, but even if it’s slightly off target, there’s still no comfortable margin of error. Spiegel fears Tesla Motors will eventually be insolvent, for one reason or another.
As much as it all seems to be about money though, it may be more about time. The company’s got cash. It just doesn’t have enough to last at its current pace, now that SolarCity is in the mix.
Demand? Maybe, or Maybe Not.
As for the other matter — DeBord’s assessment that there’s more demand for electric vehicles than Tesla will be able to supply anytime soon — the rationale more or less holds water. It’s an untested theory, however, and there are some holes in it.
Chief among the counterarguments is something Ford Motor Company (NYSE:F) CEO Mark Fields explained in an interview with Bloomberg last week.
Simply put, in 2008, a total of 12 different kinds of electric vehicles were available to consumers, and the EV market accounted for 2.3% of the industry’s sales. Eight years later — and arguably a coming of age for electric automobiles — there are 55 different EV choices available in the United States, yet they now only make up 2.8% of the automobile market. That penetration rate is suspiciously slow.
Granted, where many EVs can sit on a car lot for a while, Teslas don’t. Nevertheless, to the extent demand is expected to swell when the Model 3 becomes available, it’s going to be crimped should the price of the uber-cool Model 3 roll in closer to $50,000 rather than the suggested price of $35,000.
And of course, there’s the not-so-small matter of still-budding competition.
It’s an idea generally dismissed by die-hard Tesla fans and TSLA stock owners, and to some degree it’s merited. Most Teslas are already sold as they roll out of the factory, because they’re the iconic next-generation car. But Tesla Motors isn’t going to hold the mind-share lead forever. BMW is selling more than 1,000 electric vehicles per month in the United States now, and Nissan Motor Co Ltd (ADR) (OTCMKTS:NSANY) will sell more than 10,000 Leafs this year. General Motors Company (NYSE:GM) is going to sell more than 20,000 Chevy Volts.
Those still aren’t Tesla-like numbers, but for the lower-end crowd that are holding out for an affordable Model 3, if the Tesla EV ends up not being affordable, they may well turn to GM or Nissan … or one of many other alternatives that pop up in the meantime.
Again, the race is against time.
Bottom Line for TSLA Stock
Yes, it’s a tired argument, preaching the risks of owning Tesla stock. On the flip side, the bullish argument in support of TSLA is tired too. Yet, the debate rages on (see the comments below for evidence of that), because this storied stock is forcing investors do the one thing they hate to do the most: wait.
Were the prospects and outlook decidedly, undeniably bullish, it may well be worth the wait. With more questions than answers surrounding TSLA, though, it’s not tough to understand why Tesla stock continues to struggle even though the broad market is advancing.
This is the market’s way of saying it simply doesn’t see enough reward relative to the risk Tesla Motors poses.
That may be a hint worth taking.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.